What is the primary purpose of a bank reconciliation?

The primary purpose of a bank reconciliation is to ensure that a company's cash records match the statements provided by the bank. This process is critical because it helps identify discrepancies between what the company has recorded internally and what the bank shows. Such discrepancies can arise due to various reasons, including outstanding checks, deposits in transit, bank fees, interest earned, or errors either from the bank or the company's own accounting records.

By performing a bank reconciliation, a company can verify the accuracy of its cash balances and detect any potential fraudulent activities or accounting mistakes. This ensures that the financial statements are reliable and accurately reflect the company's financial position, particularly in terms of cash flow. Maintaining accurate cash records is essential for effective financial management, and a bank reconciliation serves as a vital tool in achieving that goal.